Think of telecommunications, supermarkets, department stores, packaging, airlines, hardware, service stations, cinema chains and commercial television.
In industries like these there’s a temptation to share the spoils — not to compete too hard on price or service.
How much stronger would that temptation be if both dominant firms in each industry were owned by the same shareholder or set of shareholders?
Neither firm might want to put the other out of business.
There’s evidence to suggest this has indeed been the case in the United States where increases in common ownership have been linked to higher airline fares, more expensive pharmaceuticals, and higher bank fees.
It’s enough to make you wonder whether there’s common ownership in Australia.
Competitors share owners
We then matched that data to shareholding disclosures for each of the firms listed on the share market and analysed the extent to which competitors were owned by the same investors.
They identify common ownership in 49 of Australia’s 443 industries.
They are significant industries. The 49 together account for more than one third of Australia’s total industry revenue.
They include commercial banking, explosives manufacturing, fuel retailing, general insurance and iron ore mining.
In firms in those industries in which we can identify at least one owner, 31% share a substantial owner with a rival.
Concentration is bigger than it looks
Market concentration is traditionally measured by the Herfindahl-Hirschman Index (HHI) on a scale in which an HHI of less than 1,500 is considered to be competitive, an HHI of 1,500 to 2,500 is considered to be a moderately concentrated, and an HHI of 2,500 or more to be a highly concentrated.
When we modified the HHI to take account of common ownership, the scores of some industries jumped.
The index for banking jumped from 1,534 to 5,850; the index for funds management services jumped from 1,254 to 3,014. The index for department stores jumped from 3,061 to 4,888.
- ^ half the market (onlinelibrary.wiley.com)
- ^ airline (onlinelibrary.wiley.com)
- ^ pharmaceuticals (papers.ssrn.com)
- ^ bank fees (papers.ssrn.com)
- ^ IBISWorld (my.ibisworld.com)
- ^ Economic Record (onlinelibrary.wiley.com)
- ^ Should monopoly businesses have an obligation to create competition? (theconversation.com)
- ^ Herfindahl-Hirschman Index (www.investopedia.com)
- ^ Common Ownership of Competing Firms: Evidence from Australia (onlinelibrary.wiley.com)
- ^ labour share of income (academic.oup.com)
- ^ low productivity growth (www.nber.org)
- ^ low investment (www.nber.org)
- ^ high prices (onlinelibrary.wiley.com)
- ^ markups (www.nber.org)
- ^ rising inequality (papers.ssrn.com)
- ^ BlackRock (www.blackrock.com)
- ^ Vanguard (www.vanguard.com.au)
- ^ 88% (hbr.org)
- ^ case study (ericposner.com)
- ^ Is Australia’s media market one of the world's most concentrated? (theconversation.com)
Authors: Adam Triggs, Visiting research fellow, Australian National University